Preventing Your Firm's 'Enron' - Part 3 of 4

6. Trust: Do you trust the client because they pay your bills? Big mistake. Of course the client is going to pay your bill if it needs your opinion to consummate a significant pending transaction like a bank loan renewal or other financing or acquisition.

7. Consistency: Doing the same thing is an auditor’s worst habit. If the audit is performed so consistent the client knows what you’re going to do, you are not independent. Do something different every year to keep the client off balance ... just 5 percent is enough to make people nervous they might get caught.

8. Surprise: Don’t tell the client what you’re planning. For example, a "surprise" cash count isn’t a surprise if you’ve done it 25 years the first day of the audit the second week in November. But the most common mistake that will get you sued is telling the client where you’re going to observe inventory. How much easier can you make it to commit inventory fraud than to tell the client where you’re going to check it? Think about it: There are only two reasons you tell the client which locations you’re observing. One is you conspired with the client to cook the books. Your only option is the "stupid" defense. Not a very good strategy. Don’t think it can happen to you? Ever heard of PharMor? The auditors missed a $500 million inventory fraud because they told the client which four stores out of 325 they were going to observe. The firm settled out of court.

9. Prepared by client: We are very good at auditing what’s on the schedule. But we’re terrible at auditing what should be there but isn’t. If the client prepares the schedules, it’s unlikely a staff person will realize the schedule is incomplete. It’s tough to say YOU audited the books when the client did your job for you. So, NO PBCs (Prepared By Clients) allowed.

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10. Demand an answer: Suppose a staff person comes across something unusual or that just doesn’t smell right. He asks the controller, "What’s this?" The controller can’t tell the truth (a small amount of book cooking). So the controller simply stares at the staff person. What does the staffer do? Gives the controller the answer he wants to hear. Why? Because in our culture, we can’t stand silence. And the staffer can show the controller how smart he is by figuring out what happened. So teach staff to stop giving the client the answer they want to hear.